Dear Board: Individual shareholders are vital

A growing number of companies face challenges with board director re-elections. New Universal Proxy rules give shareholders more voice while prevailing proxy voting trends continue to shade toward director opposition. In 2023, 654 directors failed to attain majority support from shareholders — the highest level in more than five years.

Retail shareholders have an increasing presence in the world of investing, but if fewer shareholders choose to vote, institutional shareholders will continue to consolidate their influence. It has never been more important to engage and mobilize your shareholder base to combat institutional investor dissatisfaction.

The retail investor: your board’s new bestie

The typical retail investor can be a significant asset since they tend to vote with management. Although more retail shareholders have entered the market, their voting participation remains relatively low compared to that of institutional shareholders. Retail investors as a group own 31.5% of all company shares but voted for only 29.6% of the shares they own. Institutional investors, on the other hand, voted on 82% of their shares.

Engage retail shareholders in a digital-first world

The traditional approach to boosting retail investor turnout can be a costly combination of telephone calls, overnight mailing, and reminder e-mails. In a digital-first world, shareholders expect more convenience and simplicity.

You need to think about how to use digital tools to encourage retail shareholders to participate, and how next-gen tech can reach shareholders wherever they are in real time.

A firm’s retail base can make a significant difference to the outcome of board voting, especially in tight contests. Institutional investors cast 71% of their votes against directors, whereas retail shareholders cast 74% in favor. However, it’s not always easy to get retail investors motivated to vote — plus, they own significantly fewer shares.

“The world of investor communications is changing faster than ever, and boards need to get creative with how they’re getting retail shareholders more involved,” says Demi Derem, General Manager for International Investor Communication Solutions at Broadridge.

Providing a digital capability for proxy voting so retail shareholders can seamlessly cast votes is crucial to providing a greater say.

Pass-through voting: the transparency breakthrough

Because the asset manager is the legal owner of the securities in each fund, underlying fund investors do not have the right to vote in the proxies. New innovations are enabling institutional clients to participate in voting decisions, however. This is known as pass-through voting, which gives investors more say in how asset managers vote the proxies on a fund’s underlying equities.

“The world of investor communications is changing faster than ever, and boards need to get creative with how they’re getting retail shareholders more involved.” – Demi Derem

“Pass-through voting is one of the most important developments in the proxy voting space in some time. As it continues to build momentum, it’s further going to democratize proxy voting and give voice to a large number of mutual fund investors, both institutional and retail,” says Swatika Rajaram, Senior Vice President and Head, U.S. Proxy and Prospectus Solutions at Broadridge.

Some of the largest fund companies are looking to pass votes to underlying investors; others are taking retail sentiment into account in their voting decisions. Advocates for shareholder democracy say that pass-through voting could be a greater way to bring these investors into the process and accelerate individual investor participation.

BlackRock began providing their investor accounts with voting options that made proxy voting easier and more accessible for eligible clients in 2022.¹ Schwab’s proxy polling solution now gathers additional input on their investors’ voting preferences on key proxy issues.²

Back to the classroom for the board

It’s critical to work with your board to help anticipate shareholder proposals, especially on issues surrounding environmental, social, and governance (ESG) and executive pay. The number of ESG-related shareholder proposals increased to 30% between 2021 and 2022, only to drop by half a percentage point in 2023 (25.5%). This highlights the importance of having a better understanding of shareholder expectations and the issues that they care about throughout the year, especially as sentiments change.

Share Ownership
More individual investors are entering the market. As a group, their ownership grew from 29% to 31% over the past two years.

Shareholder Voting
As a group, retail investors voted 29.6% of the shares they owned in 2023 (up 0.1% from 2022). Voting participation by institutional investors, at 80%, was at its lowest level in five years (down 2.1% from 2022).

Share Ownership
More individual investors are entering the market. As a group, their ownership grew from 29% to 31% over the past two years.

Shareholder Voting
As a group, retail investors voted 29% of the shares they owned in 2022, down from 32% in 2019. Voting participation by institutional investors, at 82%, was at its lowest level in five years.

Shareholders will have questions and boards need to be prepared to answer them. As ESG continues to be contentious, not all board members will have the requisite knowledge to speak confidently to these issues. That’s why it’s important to invest in upskilling director expertise to help clarify the strategy and craft targeted narratives that will appeal to stakeholders and garner support.

Some companies are proactively providing shareholders, and the investing public, with additional information on important issues such as ESG in annual sustainability reports. Others are retreating, taking a more cautious stance on ESG messaging. Shareholders react positively to board members that come across as aligned on priorities and knowledgeable on industry issues.

Harness the power of social media

Social media may be able to boost shareholder engagement, as well as aid in tailoring communications to different shareholder segments. As a business, you need to be asking yourself whether you’re effectively monitoring and using social media for investor relations’ purposes beyond marketing and customer service. Social media campaigns are economical too, costing a fraction of a phone campaign, which has traditionally been the most economical way to contact shareholders.

Social media can be a powerful tool to capture investor preferences and incorporate them into policies.

Combining social media ads with display (e.g., banner) ads lets you create a persistent digital presence when it matters most. Ads may feature management-friendly messaging and call-to-actions that solicit proxy participation. When shareholders click the ads, they’re directed to the proxy voting site where they can enter their control number and immediately vote their shares.

Social media can be a powerful tool to capture investor preferences and incorporate them into policies. There is a real possibility that, in the future, the retail voice will not be represented solely by the number of shares owned, but by the amount of influence that a particular investor has on social media.

"The community on Reddit has already demonstrated the appetite of retail investors to engage and influence markets through their trading activities on stocks like GameStop,” says Derem. “There can be a significant multiplier effect to investors’ activity on social media. They might only have one share, but they can trigger a massive reaction if their opinions are picked up by other shareholders in the community.”

Successful engagement happens year-round

Ultimately, a successful director reelection strategy requires businesses to implement effective strategies all-year-round, not just during proxy season. Increasing the level of retail engagement can make a big difference when it comes to overall shareholder satisfaction.

“Shareholders expect more access, convenience, and simplicity. It’s time to take shareholder engagement to a new level,” says Derem.

Digital technology is changing how communications strategies are being developed and executed. Providing a digital capability for proxy voting so retail shareholders can seamlessly cast votes is driving engagement, building loyalty, and empowering your shareholders. Pass-through voting has the potential to revolutionize the proxy voting industry; a great way to bring investors into the voting process and accelerate individual investor participation.

Keeping your board informed and educated on the issues that shareholders care about throughout the year is crucial. And finally, never underestimate the power of shareholders’ voice on social media.

“The retail investors’ voice is only going to get louder as digital and social channels increase their influence on this community. Boards that fail to meet investor expectations can expect a strong public response, but those that champion greater retail investor engagement and the drive towards vote empowerment will come out on top,” says Rajaram.

1 Empowering investors through voting choice. (2022, November). Retrieved March 20, 2023, from https://www.blackrock.com/corporate/literature/publication/voting-choice-factsheet.pdf

2 Schwab.com. (2022, October 13). Schwab Asset Management^™ Pilots New Proxy Polling Solution to gain insight into shareholder preferences. Schwab Brokerage. Retrieved March 20, 2023, from https://www.schwabassetmanagement.com/resource/schwab-asset-management-pilots-new-proxy-polling-solution-to-gain-insight-into-shareholder

3 Frantz, C., Hayden Goudy, & Ho, J. T. (n.d.). ESG-related shareholder proposals – takeaways from the first half of 2022 Carolyn Frantz, Hayden Goudy, J.T. Ho. JD Supra. Retrieved March 20, 2023, from https://www.jdsupra.com/legalnews/esg-related-shareholder-proposals-1256326/